i

PRESBYTERIAN UNIVERSITY COLLEGE, GHANA

OKWAHU CAMPUS, ABETIFI

DEPARTMENT OF BUSINESS ADMINISTRATION AND ECONOMICS

EVALUATION OF PERFORMANCE OF BANKS USING

FINANCIAL RATIOS

A DISSERTATION SUBMITTED IN PARTIAL FULFILMENT OF THE

REQUIREMENT FOR THE AWARD OF DEGREE OF BACHELOR OF

SCIENCE BUSINESS ADMINISTRATION

(ACCOUNTING AND FINANCE)

BY

EBENEZER ANSAH

OK2951/16

MAY, 2019

ii

DECLARATION

I do hereby declare that, apart from the references of other researchers’ work

which have been duly cited, this research work submitted as a project to the

department of Business Administration and Economics, Okwahu campus of the

Presbyterian University College, Ghana, for the award of Bachelor of Science in

Business Administration (Accounting and Finance) is the result of my own

research and has not been presented by anyone for any degree.

…………………………. ……………..………………

EBENEZER ANSAH DR. PAULADJEI KWAKWA

(STUDENT) (SUPERVISOR)

…………………………….. ……………………………

DATE DATE

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DEDICATION

This paper is dedicated to my newly born baby boy, Nehemiah Nana Yaw

Nyansani Opei-Ansah, and my wife, Mrs. Theodora Nana Djabeng Ansah for the

support during the tough times.

iv

ACKNOWLEDGEMENTS

I am highly grateful to the everlasting father the one who was, who is and who

will be for His mercies, good health, and life during the course.

My deepest gratitude to Dr. Paul Adjei Kwakwa (my supervisor) for the guidance

and time he spent during the project. God bless you Dr.

I really appreciate the diverse roles played by DDP Dominic Nicolas Arthur,

ADP J.B. Norteye-Akutey, and CSP Samuel Okpoti Annang in this project, it

was them who granted me to permission (thereby the peace of mind) to complete

this project during their respective tenures in office as my commander.

To my lecturers, course mates, and friends, I say God richly bless you for the

diverse roles you played.

v

ABSTRACT

The study assessed the performances of Ghanaian banks in terms of their

liquidity, solvency and profitability by applying financial ratios on the published

audited financial statements. The population of the study consisted four of the

domestically controlled banks. Data gathered was analyzed using liquidity,

leverage and profitability ratios. Current ratio, quick ratio and cash ratios were

used to assess the liquidity of the banks. Additionally, debt to asset ratio, long

term debt to capital ratio and debt to equity ratio were utilized to find out the

solvency of the banks. Finally, gross profit margin ratio, return on assets, return

on equity, and basic earning power ratio were employed to examine the

profitability of the banks. Findings revealed that the liquid positions of the banks

were below expectations. This is contrary to the banking sector report (2019). As

far as the solvency positions of the banks were concerned, findings revealed the

sector is highly leveraged. This was consistent with the findings of Owusu (2019).

Analysis of the profitability position of the banks showed that the banks are fairly

profitable as their profit averages were above that of the industry. This position

was however contrary to the findings of Ebonyi-Amoah (2017). The study

recommended that banks in Ghana should go easy with their mode of debts and

since the sector cannot operate efficiently without debts, they should rely more

on long term debts rather than concentrating on the short term debts.

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TABLE OF CONTENTS

DECLARATION .................................................................................................. i

DEDICATION ................................................................................................... iii

ACKNOWLEDGEMENTS ................................................................................ iv

ABSTRACT ........................................................................................................ v

TABLE OF CONTENTS ................................................................................... vi

LIST OF TABLES ........................................................................................... viii

CHAPTER ONE:INTRODUCTION ................................................................... 1

1.1 Background of the Study ............................................................................ 1

1.2 Statement of the problem ........................................................................... 2

1.3 Objectives ................................................................................................... 4

1.4 Research questions ..................................................................................... 4

1.5 Significance of the Study ........................................................................... 5

1.6 Organization of the Study ........................................................................... 5

CHAPTER TWO:LITERATURE REVIEW ....................................................... 6

2.1 Introduction ................................................................................................ 6

2.2 Banking ...................................................................................................... 6

2.3 History of Banking in Ghana ...................................................................... 7

2.4 Role of Banking Institutions ..................................................................... 11

2.5. Concept of Performance .......................................................................... 14

2.6. Means of Evaluating Bank Performance ................................................. 15

CHAPTER THREE:METHODOLOGY ........................................................... 22

3.1 Introduction .............................................................................................. 22

3.2. Research Design ...................................................................................... 22

3.3. Data Collection ........................................................................................ 22

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3.4. Population and Sampling ......................................................................... 22

3.5. Data Analysis .......................................................................................... 23

3.5.1. Liquidity Ratios ............................................................................... 23

3.5.2. Leverage Ratios ............................................................................... 24

3.5.3. Profitability Ratios .......................................................................... 25

3.6. Profiles of selected banks ........................................................................ 25

3.6.1. GCB Bank Limited ............................................................................. 25

3.6.2. Agricultural Development Bank of Ghana ......................................... 26

3.6.3. Fidelity Bank Ghana Limited .............................................................. 27

3.6.4. Cal Bank Ghana Limited ..................................................................... 27

CHAPTER FOUR:DATA PRESENTATION, ANALYSIS AND

DISCUSSIONS .................................................................................................. 29

4.1. Introduction ............................................................................................. 29

4.2. Findings ................................................................................................... 29

4.2.1. Liquidity Ratios................................................................................... 29

4.2.2. Leverage Ratios................................................................................... 32

4.2.3 Profitability Ratios ............................................................................... 35

4.3. Discussion of Findings ............................................................................ 39

CHAPTER FIVE:SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS ................................................................................... 42

5.1. Introduction ............................................................................................. 42

5.2. Summary of Study ................................................................................... 42

5.3. Conclusions ............................................................................................. 44

5.4. Recommendations ................................................................................... 45

REFERENCES .................................................................................................. 46

viii

LIST OF TABLES

Table 1: Current Ratio ………………………………………………………...29

Table 2: Quick Ratio …………………………………………………………30

Table 3: Cash Ratio …………………………………………………………31

Table 4: Debt to Asset Ratio…………………………………………………..32

Table 5: Long Term Debt to Capital Ratio…………………………………….33

Table 6: Debt to Equity Ratio …………………………………….…………..34

Table 7: Gross Profit Margin Ratio…………………………………….……...35

Table 8: Return on Assets Ratio …………………………………………...36

Table 9: Return on Equity Ratio …………………………………….……...37

Table 10: Basic Earning Power Ratio ………………………………….38

1

CHAPTER ONE

INTRODUCTION

1.1.Background of the Study

The Ghana banking sector has made some enormous improvement since 2001

mainly following what many pundits say has been the prudence of the central

bank which has initiated many key decisions in line with global trends. Since

2003, Universal Banking has replaced a banking industry which was hitherto

made up of a three-pillar banking model- development, merchant and

commercial banking. Changes mainly captured in the Ghana Banking Act 2004

which implemented a universal banking concept, saw an inflow of banks into the

country mainly from Nigeria, Liberia and India. This occurrence has introduced

a healthy rivalry among banks, which experts have described as sound for the

future development of the industry (Graphic Business, 2009).

The inflow saw the number of licensed banks in Ghana increasing to thirty-four

(34) in 2017. This number of licensed banks though has dropped to twenty-three

(23) as at February 2019. This was after the licenses of two insolvent banks,

namely UT and Capital banks were revoked in July 2017 due to their severe

capital impairment. Bank of Baroda voluntarily wound up, whilst GN Bank was

downgraded to a savings and loans after it was unable to meet the minimum

capital requirement set by the bank of Ghana. Additionally, seven other banks

were consolidated into the now Consolidated Bank Ghana (CBG). Of the twenty-

three (23) licensed banks, nine (9) are classified as domestically-controlled,

while the remaining fourteen (14) are foreign controlled (Banking Sector Report,

2019).

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By end of December 2017, the branch network of the banks stood at 1,483

distributed across the ten (10) regions of the country. The banking sector

experienced some improvements in its liquidity, soundness and profitability in

2018 as reflected by the key Financial Soundness Indicators (FSIs). In

comparison with 2017, the FSIs are expected to improve further on completion

of the recapitalization process and on-going reforms. The industry’s income

statement recorded an improved performance as at October 2018. The banking

sector’s total assets increased from GH¢88.91 billion (20.5%, year-on-year) in

October 2017 to GH¢106.34 billion (19.6%, year-on-year) as at October 2018

(Banking Sector Report, 2018).

1.2.Statement of the problem

It has been generally accepted now than ever before that the private sector is the

engine of growth. This statement is further emphasized by the involvement of

private entities in the businesses and activities of governments of which Ghana

is not an exception. As the presence of the Ghanaian private sector is gradually

being felt and acknowledged, its sustenance requires an efficient, innovative and

liberalized market driven financial sector.

Having seen the opportunity to provide funds for the ever growing Ghanaian

private sector, several banks have entered the Ghanaian banking industry thereby

making the sector very competitive: most of these banks (as it were in the cases

of ENRON Corporation, Parmalat SPA among others) try enhancing their image

through the publication of “attractive” financial statements to stakeholders for

informed decision making. When banks are performing well stakeholders

become elated; the government will receive its corporate tax, shareholders are

3

assured of good returns, whilst the public benefits from social responsibilities

undertaken by these banks. With ten domestic banks already wound up, another

downgraded by the central bank, and a few others involved in merger deals, it is

reasonable for stakeholders to be apprehensive.

In spite of these happenings within the industry (in the past year), most banks

(according to the Banking Sector Report, 2019) are reporting significant

increases in their profitability and asset levels. The question that comes up

naturally is, are banks reporting the true and fair situations on the ground or have

these banks resorted to creative accounting? Banks relay their performance to

their stakeholders through their Financial Statements. Most of these stakeholders

with little or no knowledge at all about financial accounting may therefore have

little or no use of the information provided by banks through the financial

statements. With stakeholders seemingly disturbed about the happenings and

increasingly looking uncertain with regards to the future of Ghana’s financial

sector, it has thus become very important for the financial reports of banks to be

examined. This study aims at clearing stakeholders’ doubts and their uncertainty

by analyzing their (banks) published financial statements so that stakeholders can

utilize it in their decisions. It must however be acknowledged that this will not

emerge as the first study to weigh the performance of these entities as several

studies undertaken by various researchers have already taken place. However,

most of these studies took place several years ago under different economic,

political and social conditions. Moreover, their evaluations were targeted at

different banks and on different financial reports. For instance, Attefah and

Darko (2016), evaluated the performance of Cal Bank using financial ratios from

2010 to 2014, Kumi et al (2013) used financial ratios to evaluate the performance

4

of Barclays Bank Ghana, Ghana Commercial bank, and Agricultural

Development Bank for 2005 to 2009. All these studies took place before the

happenings of 2017 and 2018. This study seeks to use three important financial

ratios, liquidity, leverage and profitability, in finding out the various banks’

liquidity, leverage and profitability positions (and by expansion their overall

performance) for six of their most recent years. This study has therefore become

even more crucial today as it seeks to find out the performance of banks before

and after 2017.

1.3.Objectives

The main goal of this study is to use financial ratios to evaluate the performance

of banks. The specific objectives of the study are outlined below:

To examine how well the banks have performed in Ghana.

To investigate the liquidity positions of the banks in Ghana.

To assess the solvency positions of the banks in Ghana.

To find out the profitability levels of the banks in Ghana.

1.4.Research questions

With the objectives of the study in mind, the following questions are posed:

How well are banks performing in Ghana?

How liquid are banks in Ghana?

How solvent are banks in Ghana?

How profitable are banks?

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1.5.Significance of the Study

Aside trying to lay bare the profitability, liquidity, solvency and the overall

performance of banks which will ease the confusion of stakeholders; this study

will also contribute to the knowledge available on the subject area for researchers

to pursue. Results emanating from this study could also direct the various banks

to strategically plan; taking advantage of any opportunity and appropriately

averting threats that may be exposed. Also, the Securities and Exchange

Commission could rely on this study in the event of considering listing for

Fidelity Bank in the near future.

1.6.Organization of the Study

The study was divided into five components. Chapter one consisted of the

introduction to the study. Chapter two reviewed some of the literature on the

topic. Chapter three looked at the profile of the selected banks as well the

methodology used for collecting data. Chapter four considered findings, analysis,

interpretations and presentation of data. The fifth chapter took into consideration

the summary of the findings, conclusions and recommendations.

6

CHAPTER TWO

LITERATURE REVIEW

2.1. Introduction

This chapter will review some literature on the history of banking, history of

banks in Ghana, the role of banks is also reviewed, the concept of performance,

as well as the means of performance evaluation.

2.2. Banking

According to the American Bankers Association (2014) a bank is a place where

customers’ deposits are safeguarded and these deposits used as loans for the

borrowing public. The University of Calicut (2011) described banks as bridges

between savers and borrowers, as banks accept money from savers as deposits

and give same out to borrowers as loans. A bank as a financial entity takes

deposits from the public and creates credit by engaging in lending activities either

directly or indirectly through the capital markets.

Historically, the earliest form of banking begun in the 2000BCs through the

barter trading system in Assyrian and Babylonian eras. In this system

businessmen made loans (grain loans) to traders and farmers. In the Greece and

Roman empires to follow, lending, money changing and deposits acceptance

activities came up. Research shows that these activities also took place in China

and India during that era. The beginnings of present day banking could be traced

to Italy’s rich centers like Florence, Lucca, Sienna, Genoa, among others. In the

14th century, families like the Peruzzi and Bardi dominated the banking industry.

They established branches in other parts of Europe. The Medici Bank set up in

7

1397 was one of the more popular banks in the period. The Bank of St. George

was however, the earliest known state deposit bank, it was established in 1407 at

Genoa in Italy. Practices such as fractional reserve banking and banknotes issue,

came up during the 17th and 18th centuries. Businessmen begun saving their gold

with goldsmiths based in London. These goldsmiths possessed vaults and

charged for services they render. The goldsmiths gave out receipts indicating the

quantity and quality of the gold which they held as bailees. The receipts they

issue however could not be given to third parties, only the original depositor

could present these documents for their gold. As time went by, the goldsmiths

begun giving out the money on behalf of the depositors. Promissory notes (which

later became banknotes) were issued to the goldsmiths for monies deposited as

loans to them. Interests were paid on these deposits by the goldsmiths. The

promissory note became an instrument that could move freely as a safe and

suitable form of money with the goldsmith’s vow to pay, making it possible for

goldsmiths to give out loans with low risk of non-payment. According to some

briefings on modern day banking; the bank of Vernice founded in 1157 was the

first banking organization whiles those of Barcelona and Genoa followed in 1401

and 1407 respectively. The three respective banks begun what has become

today’s commercial banks. In 1609 and 1690, the banks of Amsterdam and

Hamburg were respectively established heralding what is known as the exchange

banking (University of Calicut, 2011).

2.3. History of Banking in Ghana

Information on the history of the Ghanaian banking sector was taken from the

work of Antwi-Asare and Addison (2000). According to them, the history of

8

today’s banking industry in Ghana can be traced to the late nineteenth century.

The Post Office Savings Bank (POSB) was the first among the lots to begin

operations as a bank in the 1880s, using the premises and other facilities of the

post offices within the country. In 1896 the British Bank of West Africa

(Standard Chartered Bank) was established in the Gold Coast, Barclays Bank

DCO (Barclays Bank Ghana) was to follow later in 1917. These were foreign

banks incorporated in the United Kingdom and hence were subsidiaries. They

mainly financed trading activities between the United Kingdom and the Gold

Coast. In 1935 the Farmers’ Co-Operatives and the colonial government

established the Co-operative Bank. This bank, aside the commercial activities it

undertook, was also involved in financing cocoa buying and the activities of the

co-operative groups across the country. With the exception of the Post Office

Bank which had offices across the Gold Coast, the other banks only maintained

branches in major commercial, cocoa-buying and mining centers.

They further stated that, in 1912 the United Kingdom government established the

West African Currency Board (WACB), which was to issue currencies for the

various British colonies in West Africa. The question of setting up a national

bank emanated due to the fact that the two major banks (Barclays Bank DCO and

British Bank of West Africa) favored mainly the foreign communities (The

Europeans, the Asians, etc.) and only advanced credit to the local community on

rare occasions. Sir Cecil Trevor recommended the formation of a jointly owned

bank by the government and staffed by locals, this was after he was contracted

to examine the field of banking in the Gold Coast because of the earlier problem

between the major banks and the indigenes. In his recommendation, he

emphasized that the said bank when established should operate for the benefit of

9

the local community, maintaining government accounts as well as being an agent

during the flotation of government bonds. It was based on his examination and

subsequent recommendation that the Bank of The Gold Coast was established

and commenced operations in 1953. After 6th March 1957, Ghana left the West

Africa Currency Board and divided the bank of Gold Coast into two; Central

banking operations took place in the Bank of Ghana while the commercial

banking activities were undertaken by the Ghana Commercial Bank.

Again, they added that immediately after independence, the socialist-inclined

government of Ghana, coupled with lack of an active private sector, begun a

government driven development of the banking industry. Many state owned

banks were established by the Ghanaian government making use of the bank of

Ghana, State Insurance Corporation, and Social Security and National Insurance

Trust. In 1963 the National Investment Bank was established as a development

bank with the main aim of providing medium and long term finance for the

manufacturing and agro-business sectors. It was also to provide technical

assistance to clients. It however begun commercial banking operations from 1975.

Agricultural Credit and Co-operative Bank was next to be established in 1965

with capital from the government and the Bank of Ghana. This bank was

established from the operations of Rural Credit Department of the Bank of Ghana.

The name was later changed to Agricultural Development Bank (ADB) in 1967.

Antwi-Asare and Addison posit that the National Savings and Credit Bank

(NSCB) was carved out of the Post Office Savings Bank, which had seen several

re-organizations since the time it was formed in the 1880s. From the onset it was

a savings-only unit within the Department of Posts and Telegraphs. It was present

in most post offices across the country. In 1962 it saw the major change when

10

the Savings Bank Act was passed. This saw the separation of the Post Office

Savings Bank from the Department of Posts and Telegraphs, and a subsequent

name change to Ghana Savings Bank. However, in 1972, government legislation,

NRCD 38, reversed the name back to Post Office Savings Bank. In 1975, it

became the National Savings and Credit Bank, autonomous from the Department

of Post and Telecommunication and with power to operate as a commercial bank

when the establishment Decree was amended. The Bank for Housing and

Construction was the last development bank set up by the government. It was

established by NRCD 135 in 1973. Its main objectives were to provide mortgage

financing, participate in domestic or foreign private capital in the construction

sector, and also enter joint venture projects in the sector. It began operations in

1974. The Social Security Bank which was established in 1977 was initially

owned by SSNIT. This bank introduced the hire purchase scheme as a unit within

the bank. This scheme which allowed salaried workers who had accounts with

the bank to own consumer durables contributed to a large extent the rapid growth

in the infant banking sector. This Department (the Consumer Credit Department)

is now a limited liability company within the SSB Group.

According to the authors, the first merchant bank to be established was the

National Merchant and Finance Bank limited (Merchant Bank Ghana). It was

established in 1972 with capital from the Government of Ghana, State Insurance

Corporation, National Investment Bank and the National Grind Lays Bank of the

UK. The Ghana Co-operative Bank (COOP) which had its genesis in the Gold

Coast Co-operative Bank was established by the Association of Cocoa

Cooperative Societies in 1948. Its main goal was to mobilize deposits and finance

cocoa purchases from co-operative members. This bank (COOP) was however

11

closed down by the government in 1961 for political reasons. Its affairs were then

taken over by the Ghana Commercial Bank. It was revived again in 1973 but

could only begin operations in 1975. Its main challenge has been a small capital

base and an impaired goodwill. A share flotation in 1986 with a target of

ȼ500,000,000.00 could only yield ȼ135,000,000.00. It was not able to meet the

statutory capital requirement of 6% of risk rated assets set by the Bank of Ghana

in 1988 and 1989. As a result of liquidity challenges it had to clear it cheques

through NSCB between 1989 and 1992 since it was removed from the Bank

Clearing House. The only private bank established during this period was the

Premier Bank (Bank for Credit and Commerce Ghana Limited). It began

operations in 1978 as a commercial bank with bias for corporate and trading

sectors.

Concluding, the authors reiterated that the government’s interest in rural finance

has been encouraged since 1974. The establishment of rural/community banks in

almost all the districts within the country was encouraged by the state. As at the

end of 1998 this has resulted in the establishments of 132 rural/community banks

across the country. The banking industry that was in place before the middle of

the 1980s was as a result of a conscious effort from the government to bring into

existence entities that could fill gaps within the financial sector. This was

undertaken either directly by the government or indirectly through institutions

such as Bank of Ghana, SSNIT, SIC, among others.

2.4. Role of Banking Institutions

Hoffman (2011), as cited in Kwakwa (2014), stated that the central role of the

financial sector is to facilitate economic operations by moving funds from the

12

savers to the borrowers. By connecting those demanding to suppliers in the

capital market, they become intermediaries as far as lenders and borrowers are

concerned. As intermediaries, they act as facilitators of risk (transfer) and as such

are well positioned to manage the complexities associated with the financial

markets (Kwakwa, 2014). According to Heffernan (1996), banks are

intermediaries (special financial intermediaries) between savers and borrowers

involved in the economy. They are differentiated from other financial institutions

since they are able to provide deposit and loan services. On their part Bollard et

al (2011) stated that banks, for that matter financial institutions, contribute

immensely to living standards and economic development. They added that the

services banks offer which include clearing and settlement systems, encourage

trade, moving funds from the surplus public to the deficit public. This role of

banks according to them can also be performed by other financial institutions or

even the stock market, banks, they say, exist because they are able to manage

information efficiently by being specialists in assessing the credit worthiness of

their borrowers thereby ensuring default by borrowers is limited. In

implementing money laundering policies, Baker (2005), as cited in Abudu (2012),

suggested that banks must position themselves in a way in which they will be

able to avert and see those transactions which might involve laundered money.

The uniqueness of banks is clearly seen in their function of providing credit and

liquidity. Fama (1985) states that by holding deposits (of borrowers) with them,

banks are able to observe the movement of cash and also have access to private

information of borrowers, banks are then able to factor in these vital information

when processing the next loan. Bossone (2001) identified two important features

of banks; first, banks are able to issue debt claims on themselves that are accepted

13

as credit by the public, second, banks are able to inject credit into the economy

by giving out claims on their debts. In a nutshell, banks are able to create money

through claims on their own debts and also inject the system with credit through

lending, thereby making use of their deposit liabilities more as compared outside

credit. Heffeman (1996) said that having lots of local branches, banks are able to

offer differing services contrary to the other intermediaries who concentrate on

only specific areas. According to Goodfriend (1991), a bank’s ability to offer

credit to entities and individuals, sell stocks, pay interest to savers, receive credit

from the central bank, among others distinguishes banks from other

intermediaries. In summary banks are classified as risk managers; they evaluate

and accept risk. Liquidity risks, interest risks, credit risks, among others are some

of the more common risks banks assume and assess. Traditionally, risk

management focused on only the management of interest and liquidity risks

while a specified unit handles the credit aspect (Heffernan, 1996). Other than the

financial intermediary role played by banks, they are also crucial in the activities

of most economies. A survey undertaken by Levine (1997) revealed that

economic growth is affected by financial intermediation. Demirguc-Kunt and

Huizinga (1999), revealed that financial intermediation crucially affects the

returns to savings and return to investment. Regan and Zingales (1998), Levine

(1997) mentioned that effective financial intermediation influences the economic

growth of countries, whiles banks’ liquidity challenges leads to crisis which may

have negative effects on the economy as a whole (Caprio and Klingebiel, 2003).

The American Bankers Association added that banks alone contributed over half

a trillion of Dollars in terms of taxes in Texas alone. In 2003, banks paid almost

200 million Dollars in salary terms to over 2.1 million employees in the US.

14

According to the association, the development of various communities through

charitable causes is undertaken by banks (American Bankers Association, 2014).

According to World Bank Report (2012) the banking sector provided up to 27.74%

of Ghana’s domestic credit in 2011.This confirms that banks play an integral role

in the economic success of any economy.

2.5. Concept of Performance

Organizational performance encompasses how the real output of an entity is

compared against its budgeted output. According to Cascio (2006), as cited in

Awal and Saad (2013), performance is the level of achievement of the mission at

work place. Different researchers have varied thoughts about performance. Most

researchers used the term performance to express the variance between actual

productivity and the standard set (Stannack, 1996). According to Richardo and

Wade (2001), the success of entities displays high return on equity, this however

depends on the system of employees’ management performance established.

Harker and Zenios (1998) stated that the performance of financial entities are

indicated financially by a number of ratios. How an entity is able to be

competitive, by maintaining its presence in the market is also deemed

performance (Niculescu and Lavalette, 1999). Contributing on bank performance,

Rengasmy (2012) defined bank performance as the “reflection of the way in

which the resources of a bank are used in a form which enables it to achieve its

objectives”. The term “bank performance” according to him means the use of a

set of standards which portrays the bank’s current status and the extent to which

it can fulfill its goals.

15

2.6. Means of Evaluating Bank Performance

There are many ways in killing a cat. Like the old adage, there are many

means/techniques in measuring the performance of a given entity of which banks

are not different. Performance evaluation is the monitoring of budgets or targets

against actual results to establish how well the business and its employees are

functioning. The importance of evaluating performance has resulted in the

evolution of various techniques of performance measurement. Chenhall (2005)

suggested that performance of an organization can be measured either by

financial, non-financial or both means.

Financial, Non-Financial and Balanced Scorecard

Kaplan and Norton (1996) came out with financial measuring technique, Non-

financial performance technique and the Balanced Scorecard Technique as

means of evaluating performance. They stated that since financial and non-

financial techniques have their inherent weaknesses, the balanced scorecard

(which is a combination of both financial and non-financial techniques) should

be relied upon since the balanced scorecard technique thrives where the earlier

mentioned techniques failed. Users of this means must however bear in mind that

it involves a number of non-financial performance techniques and also moves

away from the profit reliance and other financial techniques even though it may

involve a huge number of calculations.

CAMELS Rating System

This method came up and was put to use in the United States of America to enable

them assess the state of finance of the banks (Kaya, 2001 as cited in Ostorul,

2011). The CAMELS rating system could be traced to the late 1970s and it is

16

made up of five parts, namely C- Capital adequacy, A- Asset quality, M-

Management soundness, E- Earnings and profitability, L-Liquidity and S-

Sensitivity (Cole&Gunther, 1998 and Barr et al, 2002 as cited in Khoury et al,

2018). According to Collier et al (2003), as cited in Khoury et al (2018), the

ratings ranges from 1 to 5, 1 being the best and 5 the worst.

Uniform Bank Performance Report (UBPR)

Additionally, there is the Uniform Bank Performance Report (UBPR). It helps in

measuring the liquidity, capital and earning adequacy as well as other factors that

could influence the stability of banks. The Federal Financial Institutions

Examination Council describes the UBPR as an analytical tool created for

managerial purposes and it is used for supervising and evaluation. It shows the

impact of managerial decisions economically on the financial position of the

banks. The UBP Report is a helping tool for examining the earnings adequacy,

capital, liquidity, management and asset liability as well as growth management

(Philips, 2012).

Financial Ratios

Financial ratios are techniques adopted to examine the relative efficacy of entities

by undertaking computations on the items present in the financial statements

(Ingram, 2019). Financial ratios are utilized for different purposes including the

ability of an entity to pay its debt, and assessing the value of the entity (Barnes,

1987). According to Barnes (1987), financial ratios are a preferred means of

assessment because they could be adjusted to enhance comparison among firms.

Financial ratios are broadly used mainly to compute the profitability and financial

state of a bank or firm. The firm has many stakeholders, like the owners,

17

management, employees, customers, suppliers, competitors and academics, each

having their views in applying financial statement analysis in their evaluations.

Accountants and other experts use financial ratios, for instance, to forecast the

future success of companies, while the researchers' chief aim has been to project

models using these ratios (Sarkodie et tal, 2015). Okyinyi (2012) in his studies

revealed that banks in Kenya seem to be earning much higher returns despite

being in the same environment. Sarpong et tal (2014) in their quest to assess the

performance of banks found that all the banks maintained sufficient

capitalization but were among the highest in terms asset deterioration in Sub-

Saharan Africa. Sarkodie et al (2015) urged micro finance institutions to pay

particular attention to their current, acid test and debt ratios. Hossan and Habib

(2010) after their studies found out that Beximco Pharmaceutical Company

Limited was the best performing entity.

A study by Naser (2013) seeking to find out if financial ratios could reliably

examine the performance of banks in Bahrain revealed that there is a relation

between asset management and value of equity shares. The study also revealed

that financial ratios could predict the future of banks (Sarkodie et al, 2015). Finch

(2015) mentioned that financial ratios are one of the frequently used analytical

tools for managerial decision making. Financial ratios compare different

numbers from the financial statements of a firm so that data from its performance

could be ascertained. Its explanation, more than its computation, makes financial

ratios a more important tool for managers. Users must however note that results

are limited by the fact that the analysis is based on historical financial records

(Sarkodie et al, 2015). Gilman (1925) raised the following concerns about ratio

analysis (a) ratios are not a natural measure for judging the performance since

18

companies are able to manipulate them (b) ratios easily affect the mind of users

and hide the actual position (c) ratios swing widely thereby affecting its

dependability. Fitzpatrick (1932) was able to predict the failure of firms with

accuracy, when he used ratios to analyze 120 failed firms. While other ratios

showed some prediction power, three of the thirteen ratios he used for the

analysis were precisely accurate. Rasmer and Foster (1931) established that

successful firms employ higher number of ratios than unsuccessful firms through

the use of eleven financial ratios. This was a vital contribution in the evaluation

of the usefulness of ratios. Using ratios to evaluate performance of entities is a

form of fundamental analysis that combines the various financial statements of

firms, analyze them, as well as compare the results of the analysis to those of

others within a given industry. Using financial ratios, interested stakeholders can

take relevant decisions thereon (Hossan and Habib, 2010 and Anjum, 2011).

Moore and Atkinson (1961) revealed that ratio analysis to an extent determines

the borrowing capacity of entities by stating that the capacity to pay and financial

ratios are related. Sorter and Becker (1964) who evaluated the link between

psychological model and corporate personality of financial ratios, stated that

long-established entities maintain greater liquidity and solvency ratios. Beaver

(1967), who also reviewed the prediction power of ratio analysis, revealed that

ratios are able to predict failure as early as five years before the collapse.

Techniques used in this review were more substantial than earlier studies and

also fund statement data was used in the calculation of the ratios. This study was

the foundation on which future research on ratio analysis was to be built.

Gombola and Ketz (1983) showed that profitability ratios and cash flow ratios

produce differing information, and that the fund and income statements are

19

produced for different purposes. In other words both ratios gave important as

well as different information from one another (Sarkodie et al, 2015).

Financial ratios measure various facets of the bank or company and they play

important role in analyzing the financial statements of these companies. The

financial ratios are grouped according the particular facet of the company the

ratio is deemed to measure. Whiles liquidity ratios focus on the ability of the firm

to meet its obligations timely, activity ratios tend to describe the relationship

between the firms’ sales level and the assets needed to maintain the firms’

operations. The firm’s ability to repay its long term debt is measured by debt

ratios while the firm’s profitability is evaluated by profitability ratios. Market

ratios on the other hand come to mind when the return on investment for

shareholders, and the relationship between return and the value of an investment

in company’s shares is being considered (Sarkodie et al, 2015). Financial

statement analysis using financial ratios is the most crucial and oldest for entity

performance examination. It has since long ago been used to study the positions

of companies’ terms of finance and credit, this method of analysis is based on

examination of the entity’s financial statement (Alrafadi and Yusuf, 2011).

Tofeeq (1997) was however quick to add that the mere fact that a number appears

on the financial statement of a firm does not make it important unless it is

compared to another number. According to Tofeeq (1997), a huge number of

financial ratios can be applied when analyzing the financial and credit positions

of companies. The ratio chosen for such analysis is based on the operations of

the firm and the reason for the evaluation. Ross et al (2007) were of the opinion

that majority of researchers divide the financial ratios into four main groups;

Liquidity ratios shows the firm’s ability to pay its debt in the short term. Activity

20

ratios indicate how quickly entities are able to convert their accounts sales or

cash. Debt ratios reveal how organizations are judiciously putting other people’s

funds (that is borrowed monies) to use. Profitability ratios on the other hand

contain several measures in weighing how successful firms are in making money

(Lasher, 2005). Adding to the unlimited number of ratios available, Salmi et al

(1990) added market ratios, and cash flow ratios.

Importance of Financial Ratios

Financial ratios are crucial techniques for analysis (financial). According to

Lermach (2003), the following are some of the benefits that financial ratios

possess;

a) They are used to measure performance and set performance standards.

b) They allow parties outside the organization to assess the creditworthiness of

the organization.

c) They allow firms to know their strengths and weaknesses and help these firms

to focus on improving these identified weaknesses.

d) Contributing to the financial ratios importance, Ingram (2019) added that

financial ratios provide a yardstick with which institutions could be compared.

According to him ratios are able to place firms at a relative level ground at

which they could be compared.

Shortfalls of Financial Ratios

In his work Lermach (2003) also identified shortfalls associated with using

financial ratios as a tool for performance analysis;

i. There is no acceptable law or rule as to what the right number of ratios is.

21

ii. The accuracy of comparability among firms using ratios is low as firms may

be using different accounting practices.

iii. Ratios may only provide indications of the past since they are applied on the

financial statements which are prepared on historical accounting records.

iv. Arslan and Ergec (2010), as cited in Ostorul (2011), argued that the sheer

number of ratios cause discouraging and not consistent results making them

unsuitable for measuring the overall performance of organizations despite the

fact that each ratio relates to a specific aspect of activities of these

organizations.

v. Ratios are also criticized for showing just the level of efficiency and not being

able detect the sources of inefficiencies (Daley & Matthews, 2009 as cited in

Ostorul, 2011).

22

CHAPTER THREE

METHODOLOGY

3.1. Introduction

This chapter focuses on the research design and type, a brief discussion on the

population and sampling technique, as well as the data analysis. The formulae of

the various ratios employed in this study are also revealed. At the tail end the

selected banks are profiled.

3.2. Research Design

This research was fairly quantitative as it made use of numbers. The financial

ratios analysis technique were employed in evaluating the overall performance

of the selected banks’ profitability, liquidity and leverage positions.

3.3. Data Collection

Data used in this study was secondary in nature. The audited annual financial

statements of the selected banks from 2013 to 2018 as the six- year period is

enough for any trend regarding the performance of the selected banks to be

established.

3.4. Population and Sampling

From a population of 23 banks, the researcher used a non-probability sampling

method in selecting banks for this study. Fidelity Bank Limited (FBL), Cal Bank

Limited, Agricultural Development Bank (ADB) and GCB Bank Limited were

purposively sampled. Since the beginning of the Bank of Ghana’s “clean up”

exercise of the banking sector, almost all the banks whose licenses have been

23

revoked were domestically controlled. The four banks were chosen to find out

whether this trend was likely to continue, since the four banks are also

domestically controlled.

3.5. Data Analysis

The data collected was analyzed using financial ratios. Considering the research

objectives, ten ratios falling under three major categories of financial ratios were

applied. The analysis considered six of the most recent financial statements

published by the sampled banks. Additionally, trend analysis was used. In the

data presentation, tables were utilized. The ratios used, their formulae, and

interpretations are below;

3.5.1. Liquidity Ratios

In assessing the liquidity positions of the selected banks, liquidity ratios were

used. Liquidity ratios measure a firm’s ability of retiring its short term obligations

with its current assets. Though the ideal ratio depends to some extent the type of

business, generally, a ratio of 2:1 (that is 200%) is considered optimal. This

means that for every GH₵1.00 that a firm owes in current liabilities, it has

GH₵2.00 worth of current assets which can pay off the liabilities and still have

reserves to keep the business going. Whiles a lower ratio means the firm is unable

to pay its short term bills on time, a higher ratio means the firm has idle funds

that could be put to better use. Specifically, while a quick ratio of 1:1 (100%) is

considered ideal, a cash ratio of 0.5:1 (50%) is considered optimal. For the

purpose of this study three liquidity ratios were considered, namely Current Ratio,

24

Quick Ratio, and Cash Ratio. Their mathematical representations as used in this

study are represented below;

Current Ratio = (Current Assets/Current Liabilities)*100

Quick Ratio = (cash &cash equivalents + marketable securities +

receivables/current liabilities)*100

Cash Ratio = (cash & cash equivalents + marketable

securities/current liabilities)*100

3.5.2. Leverage Ratios

Leverage ratios were utilized to find out the solvency of firms. These ratios

measure the extent to which firms use debt as part of their operations. Optimally,

leverage ratios should be 0.21:1 (that is 21%) as stated by Barth and Miller (2017).

This means that firms’ capital of GHC100.00 should consist of at most

GH₵21.00 debt. The lower it is, the better for the business. A debt to equity ratio

of 1.5:1 (150%) or lower according to Maverick (2019) is favorable whiles

anything higher is considered less favorable. Also, a long term to capital ratio of

0.5:1 (50%) is considered ideal as opined by Nguyen (2018). This study

considered three leverage ratios in its quest to determine the solvency of the

banks adopted for this study. The adopted leverage ratios are represented

mathematically below;

Debt To Assets Ratio = (total liabilities/total assets)*100

Long Term Debt To Capital Ratio = [long term liabilities/(long term

liabilities+ shareholders’ equity)]*100

Debt To Equity Ratio = (total liabilities/shareholders’ equity)*100

25

3.5.3. Profitability Ratios

Profitability ratios were used to measure the ability of firms to generate profit on

its resources during a period of time. They show how well a firm is utilizing it

assets. Whiles there are established benchmarks for some of the ratios, according

to Sarpong et al (2015), other ratios do not have any standard, instead the

performance of individual firms are compared to that of the industry or firms of

similar size. This means that there is generally no ideal ratio as far as some

financial ratios are concerned. For this reason, in its quest to find out how

profitable the banks are, the researcher compared the individual banks against

each other and that of the industry. The higher a bank’s ratio is the more

profitable the bank is. This study adopted four of these ratios, which are

represented by the following formulas;

Gross Profit Margin Ratio = (gross profit/sales)*100

Return On Assets Ratio = (net profit/total assets)*100

Return On Equity Ratio = (net profit/shareholders’ equity)*100

Basic Earning Power Ratio = (earnings before interest and tax/total

assets)*100

3.6. Profiles of selected banks

The profiles of the selected banks are outlined below;

3.6.1. GCB Bank Limited

Formerly Ghana Commercial Bank, it is the second largest bank in Ghana in

terms of total assets and net profit. According to Bank of Ghana statistics, it is

the largest indigenous financial institution in Ghana. It was founded in 1953 as

26

the bank of Gold Coast with the aim serving Ghanaians who could not obtain

finance from the foreign banks. It was carved out of the Bank of Gold Coast to

focus commercial banking activities while it twin sister, the Bank of Ghana,

concentrated on central banking duties. In 1996 it was listed on the Ghana Stock

Exchange with over twenty-one investors in the bank’s stock as at December

2016. As at December 2016, the bank had 161 network branches across the 10

regions of Ghana. Information obtained from the bank’s website

(www.gcbbank.com.gh ) indicates that the bank has the goal of becoming the

leading bank in all the markets in which it operates. Its mission is to provide first

class banking solutions to its customers and value for its stakeholders.

3.6.2. Agricultural Development Bank of Ghana

Commonly known as ADB, it is the first development finance institution

established by the Government of Ghana. It was established by an Act of

Parliament in 1965 to meet the banking needs of the agricultural sector while still

remaining profitable. Wikipedia states that before its current name ADB was

known as the Agricultural Credit and Co-operative Bank. The name change was

warranted when the Parliamentary Statute was amended to allow the bank

undertake full commercial banking operations in 1970. According the bank’s

website ( www.agricbank.com ), it offers full range of banking products and

services in consumer, corporate, parastatal, SME, Agric, trade and E-banking. Its

business is universal with a development aim on agriculture and more. The bank

was successfully listed on the Ghana Stock Exchange in December 2016. It has

offices in all the political regions across the country. The bank aims to be among

the top tier preferred banks in Ghana, balancing market orientation with a

27

development focus on agriculture and more. As its mission, the bank is

committed to growing a strong customer-centric bank, providing profitable and

diversified financial services for a sustained contribution to agriculture

development and wealth creation.

3.6.3. Fidelity Bank Ghana Limited

Information gathered from the bank’s website indicates that fidelity bank

obtained its universal banking operating license from the Bank of Ghana in June

2016. It is currently one of the twenty-three licensed commercial banks in Ghana.

It is owned by Ghanaian individuals. Its head office is at the Ridge Towers in

Accra and it operates at seventy-four additional offices within the country.

Additional information obtained from its website (www.fidelitybank.com.gh )

has it that the bank has a fully owned subsidiary, Fidelity Asia Bank Limited, in

Labuan-Malaysia since 2012. It is currently a Tier one bank committed to

becoming a top three bank in Ghana with international standards. It has the vision

of becoming a world class financial institution that provides superior returns for

all of its stakeholders.

3.6.4. Cal Bank Ghana Limited

From the bank’s website (www.calbank.net ), the bank was previously known as

Continental Acceptances Limited and Cal Merchant Bank, and commenced

operations in 1990. It however received its Universal Banking License in 2004.

It provides a broad range of banking and financial solutions to large corporations,

small and medium sized enterprises through a network of 29 branches and over

100 ATMs across the country. The bank envisages being one of the main

28

financial services group creating sustainable value for its stakeholders. As its

mission, the bank aspires to be a preferred financial institution through the

delivery of quality services, using innovative technology and skilled personnel

to achieve sustainable growth and enhance stakeholder value.

29

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSIONS

4.1. Introduction

This chapter will analyze and present findings discovered during the ratio

application. The findings are presented with the research objectives in mind. The

findings are discussed with the aim of answering the research questions.

4.2. Findings

4.2.1. Liquidity Ratios

Current Ratio

The current ratio revealed how the banks’ current assets were able to cover their

current liabilities. The table below shows the current ratio of the banks for the

various years.

Table 1: Current Ratio

Source: Annual financial reports of selected banks

None of the banks obtained the optimal ratio of 200%. In 2014 however, Fidelity

Bank ltd 235.24% was above the optimal ratio. This indicates the availability of

2018 2017 2016 2015 2014 2013 AVG

FBL 52.12 56.23 66.07 73.30 235.24 75.95 93.15

CAL BANK 67.83 21.56 80.69 104.90 97.30 98.65 78.49

ADB 74.76 71.94 66.29 90.99 91.66 92.77 81.40

GCB BANK 58.29 100.59 107.53 62.93 65.12 53.36 74.64

SELECTED

BANKS AVG

63.25 62.58 80.15 83.03 122.33 80.18 81.92

30

idle funds which can be invested to generate additional revenue. On the average,

the banks ratios were below the optimal. The banks were unable to retire their

current liabilities with their available current assets. The banks are there likely to

face liquidity challenges should their creditors demand immediate settlement.

Quick Ratio

Also known as acid test ratio, this ratio measures the ability of the banks to retire

their current liabilities relying on their cash and near cash assets. The table below

reveals the quick ratios of the selected banks;

Table 2: Quick Ratio

2018 2017 2016 2015 2014 2013 AVG

FBL 84.25 54.39 63.68 65.39 114.81 37.23 69.96

CAL BANK 39.15 50.75 38.04 48.29 57.84 41.38 45.91

ADB 76.97 63.05 63.46 40.33 36.59 26.33 51.12

GCB BANK 75.51 73.82 78.16 51.94 56.91 58.34 65.78

SELECTED BANKS

AVG

68.97 60.50 60.84 51.49 66.54 40.82 58.19

Source: Annual financial reports of selected banks

With 100% being the ideal, indications from the table above are that the banks

were unable to meet the standard with the exception of Fidelity Bank ltd.’s

114.81% in 2014. The banks total average of 58.19% was way below the

expected. The individual ratios were testament this fact as no bank attained the

standard 100% ratio on the average. The best they could attain on the average

was 69.96% by fidelity bank ltd.

31

Cash Ratio

Diving more into how liquid the banks are, the cash ratio measures how the banks

will be able to clear their current liabilities using their most liquid of assets, cash.

The higher the ratio the more liquid a bank is seen to be.

Table 3: Cash Ratio

2018 2017 2016 2015 2014 2013 AVG

FBL 84.25 54.39 63.68 45.87 70.19 29.12 57.92

CAL 39.15 50.75 38.04 19.14 30.68 31.77 34.92

ADB 64.41 63.05 63.46 40.33 36.59 26.33 49.03

GCB 75.51 73.82 78.16 51.94 56.91 58.34 65.78

SELECTED BANKS AVG 65.83 60.50 60.84 39.32 48.59 36.39 51.91

Source: Annual financial reports of selected banks

With the ideal ratio being 50%, Fidelity bank was highest with 84.25% in 2018

(as depicted by table3), this was higher than the selected banks average of

65.83%. On the overall average (6 years), GCB bank led the way attaining

65.78%. Cal bank and ADB were the two banks who failed to achieve this ratio.

The banks’ cash ratios were similar to that of the quick ratios because most of

the banks did not have receivables among their assets.

32

4.2.2. Leverage Ratios

In ascertaining the leverage proportions of the various banks, leverage ratios

were used. These ratios examine the amount of debt that the various banks have

employed as part their capital structure. Three of these ratios are used to assess

the selected banks in this study. Tables 4 to 6 depict the results obtained by the

researcher.

Debt to Assets Ratio

This ratio assesses the percentage of debt the banks used in financing their assets.

Table 4: Debt to Assets Ratio

Source: Annual financial reports of selected banks

Banks on the average during the six years used up to 85.58% debt in financing

their assets. On the average FBL employed 88.97% debt for their assets, GCB

bank followed closely with 84.48% whiles ADB and Cal bank were rightly

behind with 84.14% and 84.48% respectively. These ratios are way above the

required 21% expected. This indicates that the banks have taken on more debts

in financing their assets than expected.

2018 2017 2016 2015 2014 2013 AVG

FBL 89.94 89.93 88.22 87.48 87.47 90.79 88.97

CAL BANK 85.62 84.09 85.64 84.56 85.29 81.65 84.48

ADB 82.22 86.49 85.02 84.40 84.06 82.67 84.14

GCB BANK 86.48 87.39 82.55 81.72 83.81 86.31 84.71

SELECTED BANKS AVG 86.07 86.98 85.36 84.54 85.16 85.36 85.58

33

Long Term Debt to Capital Ratio

This ratio measures the proportion of long term debt in the banks’ capitalization.

The results of are displayed in the table below;

Table 5: Long Term Debt to Capital Ratio

2018 2017 2016 2015 2014 2013 AVG

FBL 15.55 - - - 81.26 0.32 16.18

CAL BANK 8.00 5.47 9.79 8.57 7.11 7.27 7.70

ADB 13.18 1.68 6.31 3.39 2.70 1.30 4.76

GCB BANK 26.82 25.30 1.27 10.16 22.74 7.10 15.57

SELECTED

BANKS AVG

15.89 10.82 5.79 7.37 28.45 4.00 15.10

Source: Annual financial reports of selected banks

The analysis as represented by the table above reveals that each of the four banks

performed well as they all attained less that the benchmark 50%. ADB however

performed better among the banks with its 4.76% average ratio. Cal bank

followed with 7.7%, GCB bank was next with 15.57% whiles Fidelity bank

attained 16.18%. This means that ADB uses the least long term debt as far as the

bank’s capital is concerned, in every GH¢1.00 capital the bank employs

GH¢0.0476 in long term debt. This is better than Cal bank’s GH¢0.077, GCB

bank’s GH¢0.1557, Fidelity bank’s GH¢0.1618, and the banks’ average of

GH¢0.1510.

34

Debt to Equity Ratio

This ratio measures the relative proportions of debt and equity as they are

employed in the financing of the firm’s activities. The table below illustrates the

proportions of debt and equity of the respective banks.

Table 6: Debt to Equity Ratio

2018 2017 2016 2015 2014 2013 AVG

FBL 894.00 892.96 748.96 698.84 698.36 985.28 819.73

CAL 595.28 528.38 596.60 547.64 579.63 444.90 548.74

ADB 462.35 640.09 567.47 557.85 527.30 477.15 538.70

GCB 639.50 692.90 473.16 445.59 517.82 630.55 566.59

SELECTED

BANKS AVG

647.78 688.58 596.55 562.48 580.78 634.47 618.44

Source: Annual financial reports of selected banks

The above table indicates that the banks make more use of debt as compared to

equity in their operations. On the average FBL’s debt employed is 7x that of its

equity, Cal bank, ADB and GCB bank have a little above 5x of their respective

equity funds. These ratios are significantly above the 150% which is an indication

of the banks utilization of more debts as compared to equity. Even though none

of the banks attained the standard 150%, ADB’s 538.7% was lower than Cal

bank’s 548.74%, GCB bank’s 566.59%, Fidelity bank’s 819.73%, and the

industry’s 618.44%. THIS Means that ADB employs GH¢5.38 debt against the

bank’s GH¢1.00 equity, Cal bank GH¢5.48 debt against GH¢1.00 equity, GCB

bank GH¢5.66 debt against GH¢1.00 equity, and Fidelity bank GH¢8.19 debt

against GH¢1.00 equity.

35

4.2.3. Profitability Ratios

Profitability ratios measure the effectiveness of firms in revenue generation. The

ratios are concerned with yield that firms make on their invested funds; they are

very popular (McLaney, 2009). These ratios examine the performance of firms

in terms of their ability to generate revenue from their operations. For the purpose

of this study four of these ratios are considered. Calculated results by the

researcher are presented in tables 7 to 10.

Gross Profit Margin Ratio

Gross profit margin ratio measures the relationship between gross profit and sales.

The following table is the gross profit ratio of the selected banks:

Table 7: Gross Profit Ratio

2018 2017 2016 2015 2014 2013 AVG

FBL 64.52 63.70 57.48 60.61 53.68 46.78 57.80

CAL BANK 54.53 52.54 45.07 53.26 51.85 53.89 51.86

ADB 55.43 59.44 53.82 57.38 67.42 75.86 61.56

GCB BANK 71.36 75.37 86.87 87.18 86.54 83.32 81.77

SELECTED

BANKS AVG

61.46 62.76 60.81 64.61 64.87 64.96 63.25

Source: Annual financial reports of selected banks

The table above reveals that GCB bank’s average ratio of 81.77% was the highest

gross profit margin with ADB (61.56%), FBL (57.80%) whiles Cal bank had the

least margin with 51.86%. The performance of the various banks as far as this

ratio is concerned was not consistent as it was an up and down sort of. This means

that GCB Bank’s profit generation from sales is better that that of the other banks,

36

it is even higher than the banks’ average. For every GH¢1.00 of sales, GCB bank

generates an average GH¢0.81 in gross profit, which is higher than banks’

average of GH¢0.63.

Return on Assets Ratio

This ratio evaluates the contributions of the various banks’ assets in the net profit

made during the financial year. Ahmed (2009), as cited in Kumbirai and Webb

(2010), stated that this ratio depicts the ability of management in acquiring

deposits affordably and investing them in high yielding investments. Below are

the realized ratios for the respective banks;

Table 8: Return on Assets Ratio

2018 2017 2016 2015 2014 2013 AVG

FBL 2.17 1.90 0.67 3.71 2.47 2.90 2.30

CAL BANK 2.63 3.61 1.47 4.94 5.27 5.98 3.98

ADB 0.25 0.68 (2.31) (3.70) 2.22 4.97 0.35

GCB BANK 3.08 2.65 4.83 5.47 6.62 6.73 4.90

SELECTED

BANKS AVG

2.03 2.21 1.17 2.61 4.15 5.15 2.88

Source: Annual financial reports of selected banks

The assets return generation was generally low as indicated by the banks’

averages. As indicated by the above table GCB bank led the way with an average

generation of 4.9%, Cal bank followed with 3.98%, with Fidelity bank recording

2.30% whiles ADB had the least average return on assets rate with just 0.35%.

The implication is that averagely whiles GCB bank makes GH¢0.49 net profit on

every GH¢1.00 worth of assets, Cal bank makes GH¢0.39, Fidelity bank makes

37

GH¢0.23, with ADB only making GH¢0.035. Management of GCB bank made

judicious use of the bank’s assets more the others and it remained more profitable

than the industry.

Return on Equity

Similar to the return on assets, return on equity assesses the contribution of equity

funds in the net profit generation.

Table 9: Return on Equity

2018 2017 2016 2015 2014 2013 AVG

FBL 21.59 18.82 5.66 29.60 19.69 31.43 21.13

CAL 18.28 22.68 10.21 32.00 35.83 32.59 25.27

ADB 1.41 5.06 (15.40) (24.46) 13.92 28.69 1.54

GCB 22.74 21.00 27.67 29.82 40.93 49.18 31.89

SELECTED

BANKS AVG

16.01 16.89 7.04 16.74 27.59 35.47 19.96

Source: Annual financial reports of selected banks

Equity funds in GCB bank generated most in the six year analysis in terms of the

percentages with an average return rate of 31.89%, Cal bank’s equity had second

most highest average with 25.27% whiles ADB had the least return rate among

the four banks with an average rate of 1.54%. There were negative return rates

in the equity funds of ADB during the 2015 and 2016 analysis with returns on

equity as low as -24.46% and -15.40% respectively. Fidelity bank made the third

most net profit among the four banks with its average return of 21.13%. GCB

bank’s profit generation was higher than the industry in each of the six years of

38

the analysis. Cal bank and Fidelity bank also had higher net profit generation as

compared that of the industry albeit below that of GCB bank.

Basic Earning Power Ratio

The basic earning power of a firm indicates how the firm’s assets aids in the

generation of the firm’s total earnings before taxes and interests are deducted.

Table10 displays the various banks’ basic earning power ratios.

Table 10: Basic Earning Power

2018 2017 2016 2015 2014 2013 AVG

FBL 3.71 2.76 0.34 5.26 3.83 3.80 3.28

CAL BANK 4.11 5.18 0.47 6.58 7.31 8.16 5.30

ADB 0.95 1.34 (3.48) (4.69) 1.61 5.18 0.15

GCB BANK 4.20 3.45 7.69 7.75 9.27 9.31 6.95

SELECTED

BANKS AVG

3.24 3.18 1.26 3.73 5.51 6.61 3.92

Source: Annual financial reports of selected banks

Table 10 reveals that GCB bank’s assets contributed 9.31% toward the

generation the bank’s total earnings before interest and tax in 2013, this however

dropped to 3.45% in 2017. GCB Bank’s performance fell consistently from 2013

(9.31%) to 2017 (3.45%) and rose again in 2018 (4.20%). The highest any of the

other banks could do was Cal bank in 2013 when the bank’s asset had 8.16% rate

in the earnings before interest and tax generation. FBL’s basic earning power had

been a topsy-turvy affair: the bank’s earning power rate rose from 3.80% in 2013

to 5.26% in 2015. This went down to as low as 0.34% in 2016 and rising ever

since to 3.71% in 2018. ADB’s average earning power rate of 0.15% being the

39

least among the four banks. In 2015 and 2016 ADB’s earning rate was -4.69%

and -3.48% respectively. This means that when it comes to how the banks utilize

their assets to generate earnings before interests and taxes are effected, GCB bank

was able to generate the most EBIT with a rate of 6.95%, Cal bank followed

closely with 5.30%, Fidelity bank also following with 3.28%, whiles ADB was

only able to raise 0.15%.

4.3. Discussion of Findings

The analysis above revealed trends that might be of interest to stakeholders about

the four banks. The objective of the study was to find out the liquidity, leverage,

and profitability of the four banks in particular and to some extent the banking

sector as a whole.

Liquidity

The selected banks seem to be not doing so well as far as banks’ liquidity is

concerned. The banks on the average failed to keep the needed ratio, the overall

liquidity was below the standard 200%. This might be as a result of the banks’

failure to keep enough assets in the form of non-fixed assets or the banks’

pleasure in keeping most of their debts in the form of short term debts. That is

the banks either failed to keep enough of their assets in the non-fixed form or

their borrowings were focused mostly on the money markets instead of the

capital markets thereby resulting the illiquidity of the banks. Another reason

might be that the banks are investing all their liquid funds with the view of

earning additional returns. The Business and Financial Times Online also

suggests that the illiquid nature of the banks may be as a result of the banks

experiencing cash flow constraints, high fixed costs, and generating revenue that

40

are sensitive to economic recessions. With banks contributing more than

GH₵200million in form of additional capital to the central bank, one would have

expected that the banks liquidity would have been positively affected. Maybe the

injected capital would be felt in subsequent years of the sector. The bank of

Ghana’s Banking sector report (2019) posits a contrary outcome. The report

states that the sector’s liquidity is adequate. The findings of Sumaila (2015)

suggests that the banking sector of Ghana’s liquidity is above the global average.

A press release by the sector’s regulator however suggests that sections of the

sector are illiquid thereby to some extent agreeing with findings of this study.

Solvency

Analysis of the solvency positions of the banks indicate that the banks are highly

leveraged. In other words the banks took on more debts during the period of

analysis in their operations. This might be the nature of the sector as almost all

the banks analyzed seem to be heavily leveraged. Caprio and Kingebiel (1996)

opines that insolvency of banks can be traced to the late 1970s. They added that

the issue of solvency dates back in 33 A.D. This suggests that the leverage

positions of the banks revealed is not new, earlier studies seem to go similar way.

The bank of Ghana’s press release acknowledges the fact that some banks in the

country are insolvent. According to Kapotwe (2018), at one point the governor

of the Bank of Ghana described some of the banks as “deeply insolvent”.

Profitability

Analysis of the banks’ audited financial statements revealed that the banks profit

levels are averagely above the industry average. This means that the banks are

profitable. According to Gyenti (2019), the Ghana banking sector remained

41

profitable with the industry seeing an 8% year on year growth in terms of the

average operating revenue. The banking sector report (2019) posits that the

banking sector’s profitability moderated, with growth reducing from 21.7% in

2017 to 1.5% in 2018. The decline, according to the report, is as a result of the

general decline in interest rates, lower levels of loans, and borrowings. The

Ghana Report (2019), posits that in spite of the challenges confronting the

banking sector in Ghana, it remained profitable. Ebonyi-Amoah (2017), on his

part however, states that the profitability of the banking sector in Ghana is

generally low.

42

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND

RECOMMENDATIONS

5.1. Introduction

Having analyzed, interpreted and presented data in the previous chapter, this

chapter presents summary of the researcher’s findings, conclusions and

recommendations.

5.2. Summary of Study

The study was to evaluate the performance of banks in Ghana by applying

financial ratios on their audited financial statements from 2013 to 2018. The

selected banks for this study were Fidelity Bank Ghana Limited, Cal Bank

Limited, Agricultural Development Bank and GCB Bank Limited. The first

chapter presented the state of Ghana’s banking sector. The improvements that

has taken place since the introduction of the universal banking license, the

problem statement, objectives of the study, its significance, and the organization

of the study were all outlined in the first chapter.

In the second chapter, works undertaken by other researchers which were related

in one way or the other were reviewed. The origin of banking, history of banking

in Ghana, and the roles of banks were some of the literature considered. Chapter

three saw the methodology adopted for this study outlined. Data collection,

research design, data analysis were all outlined. Also, the selected banks for study

were profiled. The forth chapter saw the presentation and analysis of data, and

43

discussion of findings. The fifth and final chapter of the study considered the

summary of the study, conclusions and necessary recommendations.

Summary of major outcomes of the study include;

Liquidity Ratios

In assessing the liquidity positions of the banks, three ratios were computed.

Namely current ratio, quick ratio and cash ratio. The analysis revealed that the

banks’ liquidity positions were low. Overall, Fidelity Bank did better in terms of

the liquidity analysis, with GCB Bank following. Cal bank was the least liquid

among the four banks per the analysis.

Leverage Ratios

These ratios were considered in the researcher’s quest to find out the solvency

positions of the banks. In so doing three of the leverage ratios were adopted, debt

to assets ratio, long term debt to capital ratio and debt to equity ratio. The

outcome was that the banking sector is highly leveraged. In all ADB was the least

leveraged bank among the four banks.

Profitability Ratios

In the quest to find out the profitability of the banks, four profitability ratios were

employed. The gross profit margin ratio, return on assets, return on equity and

basic earning power ratio. The analysis indicated the banking sector to be fairly

profitable. Of the banks considered, GCB bank was the most profitable.

44

5.3. Conclusions

The liquidity ratios indicated that none of the banks was able to meet the

acclaimed 2:1 ratio. Fidelity Bank Limited appear to be more liquid than the other

banks as its ratios were relatively higher. The leverage ratios revealed that the

banks are highly leveraged. The banks used a lot of debt in their operations during

the years under review. This confirms the position of the regulator in its banking

sector report (2019), which indicated that the banking sector’s borrowings had

risen by 71% in 2018. Long term debts however constituted the minority in these

borrowings. The position was further was reiterated during the debt to equity

analysis of the banks. With increase in assets, one would have expected the profit

levels of the banks to increase significantly if not proportionate to the assets

growth. This was however not to be as the banks made just marginal

improvements in their profitability levels despite the fact that their average profit

levels were higher than the industry average.

General indications point Fidelity Bank limited to be the most liquid among the

sampled banks despite the fact that it was not able to meet the expected 2:1 (200%)

ratio. The leverage ratios revealed that all the banks were highly leveraged with

ADB having the least ratios on the average notwithstanding the fact that its ratios

were also on the high side. Thus ADB performed better in the leverage ratios.

GCB Bank led the way in the profitability ratios, with Fidelity Bank Limited and

Cal Bank closely following.

45

5.4. Recommendations

Having analyzed the banks performance over the past six years in the course of

this study, the following recommendations are made;

1. To avert the problem of disappointing their clients, the banks should keep

more liquid assets in order to meet their short term obligations as and when

they may fall due. This is likely to raise the dwindling confidence that clients

have in the financial sector.

2. The banks should slow down the rate of their borrowings. This will reduce

the costs associated with them, thereby increasing their profits, and in the

process boosting investors’ confidence. This is not however a suggestion for

debts to be thrown out entirely as debts are necessary evils.

3. The banks should focus on improving their profitability levels so that more

investors would be attracted. The banks can do this by reducing their lending

rates for example, which will lead to more borrowers being attracted

resulting in more interest income in the process.

4. Returns on the banks’ assets should be maximized by the banks seeking

income generation avenues aside the lending rates. The banks can venture

into investments to get additional income.

5. The banks can also resort to long term borrowings instead of the ever

increasing short term funds. This will relieve them of the tendencies of

keeping funds, which could have been invested idle, just to meet short term

debts.

46

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